New laws and regulations – EU Taxonomy, SFDR, Human Rights Due Diligence, CSRD and Climate Declaration of Buildings
A number of laws of importance for the field of sustainability have been implemented during 2021, and there are more laws and regulations to come. The specialist team at Position Green is carefully following the development. Here we present a compilation of laws and regulations which soon will come into effect, with importance for companies to be prepared for.
The purpose of the EU green taxonomy is to simplify the identification and comparison of environmentally sustainable investments for investors. This is achieved through a classification system targeting environmentally sustainable finance businesses. Three categories of businesses are taxonomy compatible:
- Already green businesses
- Transition businesses
- Enabling businesses
For a business to be classified as environmentally sustainable according to the taxonomy, it should fundamentally contribute to one or more of the six determined sustainability and environmental goals, and at the same time not cause significant damage to any of the remaining goals. In its initial phase, the taxonomy includes climate change. In 2022, extensions of the taxonomy will be implemented to also include water and marine resources, transitions to circular economy and environmental degradation and biodiversity. Besides substantially contributing to and not creating considerable damage, any activity should also fulfill a number of minimum requirements within sustainability. Specifications of what counts as substantial contribution and considerable damage for different financial activities, are described in the Regulatory Technical Standards. 4th of July, the Commission adopted the first delegated act with reviewing criterias for the two climate related goals within the taxonomy, which should be applied from January 1st 2022.
The requirement operates solely at the EU level and not at national level, which leads to large companies of public interest (PIE) according to the EU definition of more than 500 employees being required to declare according to the taxonomy.
Sustainable Financial Disclosure Regulation
The Disclosure regulation, or SFDR, regulates how actors of the financial market and financial advisors should inform investors and customers on a number of sustainability indicators. The SFDR aims to harmonize requirements on sustainability related information, decrease information asymmetries and increase attractiveness of sustainable investments. Investment funds, insurance companies and financial advisors should, according to the regulation, inform on how sustainability risks are integrated in the activities, how negative consequences are considered and if the company has products with sustainable attributes or goals.
The regulation was implemented in March 2021 and it contains information on policies to identify and prioritize negative consequences, which should be presented at unit level on companies’ websites. The EU Commission has developed an outline for technical standards, called the Regulatory Technical Standard (RTS), which will be implemented from January 1st 2023. RTS contains a framework for reporting on negative consequences, with 18 mandatory indicators, as well as 22 voluntary indicators related to environmental aspects and 24 on social aspects. A stand point on negative consequences according to the RTS is supposed to come into effect in June 2023.
The Disclosure regulation applies a double perspective and results in the financial market needing to disclose the difference between impact on and from an investment.
Human Rights Due Diligence Directive (Sustainable corporate governance)
The new Human Rights Due Diligence Directive was presented as a EU bill to the Commission by the EU Parliament in March 2021. The directive commands that companies take responsibility for their supply chains and take actions in order to ensure human rights and decreased environmental damage. The intention of this new law, is that voluntary due diligence and national and sectoral regulations are not enough to combat recurring issues on child- and forced labour, pollution, land grabbing and corruption.
The regulations will apply to large IPO companies on the European market, as well as small and medium sized companies with high risk and companies providing financial products and services which are included in the regulation. The companies are expected to present a strategy on due diligence and its implementation process. The directive will be implemented during 2021.
Corporate Social Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) replaces the current Non-Financial Reporting Directive (NFRD) with the ambition to create a comparative standard equivalent to financial reporting standards. CSRD will be a legal requirement under the taxonomy. Therefore, they can be seen as a common EU strategy to increase and improve the financial flow of capital towards sustainable activities. Actors included in the CSRD are IPO companies on regulated EU markets, besides micro companies and partly IPO SME:s with three or more years of implementation, as well as all companies classified as large according to the CSRD.
A company is classified as large if two out of three of the following criteria are met:
- Companies with more than 250 employees.
- Companies with a financial turnover of at least € 40 million.
- Companies with total assets over € 20 million.
The implementation of CSRD has slowly begun during 2021 and will be continued to 2024, as companies are required to report during 2023 at latest.
Climate Declaration of Buildings
On the first of January 2022, new requirements on climate declarations during the construction of buildings were implemented. In short, this new law means that constructors must declare the climate impact of buildings. The purpose is to mitigate emissions and climate impact from the construction. The requirements apply to the construction of a new building when an application for a building permit is submitted after January 1st 2022. The declarations are digital and should be uploaded to the register for Climate declarations at the National Swedish Board of Housing, Building and Planning (Boverket).
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